Increase Your Tax-Deferred Savings

We're always concerned about how much taxes drain from our pocketbooks. What better time to think of new ways to reduce your current and future tax burden while seeking to build wealth. As a participant in your retirement plan, you have opportunities to do it all in one step. By boosting your regular plan contributions, you receive the double benefit of building a bigger nest egg while cutting back the amount you have to contribute to Uncle Sam today and over time. That may help your bottom line today and late in life, when you need to tap your retirement savings.

Christine and Carl -- Taking Different Approaches
Consider the case of these two hypothetical wage earners, Christine and Carl. Both are concerned about saving more for retirement and trying to trim their current tax burden. Both earned $30,000 per year (a paycheck of $2,500 each month). But each followed a different path to achieve their objectives. Carl decided he didn't have many options available to trim his tax bill, but all sorts of ways to save. He was determined to put 10% of his monthly salary away to help meet future needs. His investment of choice -- a taxable mutual fund. He invested money on an after-tax basis -- that is, after taxes were deducted from his paycheck. While that certainly offered Carl a solid opportunity to build for his future, he didn't take full advantage of the tax benefits that were available to him.

Carl's Savings Plan
Gross monthly salary	$2,500.00
Tax-deferred savings	$0.00
Net before-tax income	$2,500.00
Income tax	$500.00
Social Security Tax	$191.00
Net pay	$1,809.00
After-tax dollars invested	$250.00
Net cash available	$1,559.00

Christine chose a different path. She too planned to put 10% of her paycheck to work toward her retirement. But rather than putting after-tax dollars to work in a taxable investment, she determined that she could come out ahead putting more money to work in her workplace retirement plan. Not only will the money grow on a tax-deferred basis, but she'll actually have a few more dollars left to spend each month after she invests! That's because she is using pre-tax dollars to fund her retirement account.

Christine's Savings/Tax Reduction Plan
Gross monthly salary	$2,500.00
Tax-deferred savings	$250.00
Net before-tax income	$2,250.00
Income tax	$450.00
Social Security Tax	$191.00
Net pay	$1,609.00
After-tax dollars invested	$250.00
Net cash available	$1,609.00

Christine's Double Advantage
As this example shows, Christine has successfully reduced her current tax burden, and may also have the opportunity to build her nest egg more quickly.

First, the bottom line for today -- after both invest $250 per month, Christine still has an extra $50 per month of spending money compared to Carl. That's $600 per year! After 30 years, that adds up to $18,000. Naturally, once Christine begins to withdraw from her retirement plan, she will be subject to taxation as ordinary income.

Second, her savings will grow on a tax-deferral basis. It is another way Christine keeps her current tax burden under wraps. By contrast, Carl will have to pay taxes on realized earnings (dividend income and capital gains) each year. This will give Christine an important advantage over time, as her nest egg will be able to grow more quickly.

Hypothetical Investment: Pre-tax deferred versus after-tax savings
The bottom line is a clear advantage, both in terms of today's tax-savings, potential long-term retirement savings and even tax-savings in the future for those who put more pre-tax dollars to work in their workplace retirement plan. Take a careful look at your own needs and current savings strategy. Then see what you can do to help your tax situation today and your long-term savings objectives.

Content is for informational purposes only and may not accurately reflect your specific situation. Information is not intended to provide financial, legal, tax, or accounting advice. You should consult a qualified advisor for advice specific to your own circumstances.